Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297390 
Year of Publication: 
2023
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2023-5
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire-for a given age and income level-to hold assets. We begin by presenting a simple explanation for this pattern that relies on integrating retirement and intertemporal substitution motives in saving decisions. We then show how the interaction of these two saving motives can have profound implications in terms of the shape of asset demands, the possibility of multiple steady state real interest rates, and a potential role for monetary policy to influence the long-run evolution of real rates. The framework highlights how an inflationary episode followed by a strong monetary response, as we are currently witnessing, can have long-term implications for real interest rates.
Subjects: 
Monetary policy
Interest rates
Inflation targets
Monetary policy framework
Inflation andprices
Fiscal policy
Economic models
JEL: 
E21
E52
E31
E43
E58
E62
G51
H6
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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